UNLOCK THE SECRET OF GROWING YOUR MONEY.

The rule of 72 is arguably one of the most important formulas that has ever been developed. The famous physicist Albert Einstein once claimed that it is ‘the best invention in finance’. And guess what? That is one easy way- the simplest way for you to change your personal finance life. Let me demonstrate this rule to you and how it can assist you.

What is the rule of 72?

The rule of 72 is a simple and convenient way to determine how many years it will take to double your money using the power of compound interest. Luca Pacioli first introduced this idea in 1494, but it is still relevant to date.

How does the rule of 72 work?

Understanding this rule may be a little bit confusing but here is how it works.

It’s easy! You just need to take the number 72 and divide it by the combined annual interest rate. The consequence is the time it takes for your money to double or the interest rate compounded annually. Simple, right?

Well, Let Us Review Some Examples

• Example 1:

Starting balance: $10,000

Annual interest rate: 6%

Calculation: 72/6 = 12 years

Results: Your $10,000 will take 12 years to grow to $20,000

• Example 02:

Starting balance: $10,000

Annual interest rate: 8%

Calculation: 72 / 8 = 9 years

Results: By our calculations, your invested $10,000 will be worth $20,000 in 9 years

The rule walks both ways

The rule of 72 isn't just about growing your money. It will also show you how long it will take for inflation to cut your money's value in half

• For example:

Starting balance: $10,000

Current inflation Rate: 8%

Calculation: 72 / 8 = 9 yrs

Results: In 9 years, your $10,000 will only be worth $5000 in today's dollars.

How accurate is it?

The rule of 72 works best for interest rates between 6% and 10%. If your rate is outside this range you can tweak the formula a bit. Just add or subtract 1 from 72 for every 3% the rate is away from 8%.

Tweaking the rule

• Interest rate: 11% ( which is 3% higher than 8% )

Adjust the rule: 72 + 1 = 73. then in this case use 73 instead of 72

Calculation: 73 / 11 = 6.6 years to double your money

• Interest rate: 5% ( Which is 3% lower from 8% )

Adjust the rule: 72 - 1 = 71. then in this situation, we use 71 instead of 72

Calculation: 71 / 5 = 14.2 years to double your money.

The impact of small changes. [small changes have big effects: Albert Einsten]

It is important to realize that even the slightest changes to your interest rates can dramatically alter your money’s growth rate. That is simple when it comes to compounding of interest it works like magic. Therefore, using the rule of 72, you can maximize the returns on your invested funds, and make better investment choices.

So next time you're thinking of your savings or investments, see how the rule of 72 can help in the decision-making. Essentially, it is a basic application that can make your financial picture clear and help to become financially prosperous, quicker. Happy saving!